President seeks to reduce fears over governability

Event

The president, Cristina Fernández de Kirchner, gave a rare public speech on February 4th, in what appears to have been an effort to demonstrate that she is in control of the political agenda amid growing fears over her extended absence from the political scene since surgery in October 2013.

Analysis

Ms Fernández's address came after opposition and pro-government politicians alike expressed concerns over governability as the government's economic problems mount. The pro-government Misiones governor, Maurice Closs, had, for example, requested a multisectoral roundtable meeting designed to prevent Ms Fernández's early departure from government. Mr Closs compared the current economic crisis with those that triggered the early departure from the presidency of Raúl Alfonsín in 1989 and Fernando de la Rúa in 2001.

Ms Fernández refrained from announcing any difficult adjustment measures (continuing a strategy in place for several months under which she announces only good news, leaving the announcement of adjustment measures to her ministers). Instead she announced a rise of 11.3% in minimum retirement benefits and non-contributory pensions from March. Reading between the lines, however, this announcement does suggest the government is trying to get a hold on the public finances. Retirement benefits are adjusted twice a year every year, in March and September. The rise announced by Ms Fernández is in fact lower than that granted in September 2013 (14.4%), despite the fact that inflation has accelerated rapidly since then.

In another indication that the government may well be preparing the ground for a difficult fiscal adjustment, Ms Fernández said during her speech that it was unfair that those who are able to afford to buy dollars for savings purposes (taking advantage of a recent relaxation of foreign-exchange controls) are receiving subsidies through frozen energy tariffs. This has been interpreted as an indicator that the government will soon start to cut its energy subsidies, which are an unsustainable burden on the public finances.

However, given the delicate political, economic and social situation, fiscal adjustment measures will be resisted. After the president's speech, teachers announced that they would seek a wage rise of 61% in upcoming annual negotiations, and threatened to go on strike before the start of the school year in March.

Impact on the forecast

Despite the latest effort to reduce fears over governability and lay the groundwork for fiscal adjustment, we continue to believe the risks of deepening economic crisis and a surge in social unrest are very high.